Summary
Banking summary 17/20
- Course
- Institution
summary based on slides + own notes. 21pg summary, then exercises + solutions. I achieved 17/20 with this.
[Show more]
Seller
Follow
lunadejonghe
Content preview
BANKING AND FINANCECHAPTER 1: GOALS AND GOVERNANCE OF THE CORPORATION
INVESTMENT AND FINANCING DECISIONS
CASH OUT = how the money is spent
- Where did the cash go?
- Which investments have been made?
CASH IN = how the money is raised
- Where did the cash come from?
- How to finance the investments?
Investment decisions:
- Capital expenditure (CAPEX) or capital budgeting decisions = spend
money
- Purchase of real assets = assets used to produce goods & services
- Tangible or intangible
- Long/short term consequences pay off
- Billion USD/EUR or small money
- Success story or complete disaster
Financing decisions:
- Decisions on the sources and the amount of financing = raise
money
- Issuance of financial assets to finance investments in real assets
- Capital structure decision: debt financing vs equity financing
EXAM QUESTION: what does the capital structure mean? = how
is the company being financed
- Variety of financial assets: stocks, loans & bonds
- Can destroy value if they are stupid or ambushed by bad news
WHAT IS A CORPORATION?
Corporation:
- Separate legal entity: created via articles of incorporation
- Distinct from its shareholders: shareholders have limited liability
o Can lose entire investment, but nothing more
o Creditors of the company have no recourse to other assets of the
shareholders
- Permanent: can in theory live forever
, - Publicly listed (you can buy shares) or privately owned
- Shareholders do not own the real assets: indirect ownership via
financial assets
WHO IS THE FINANCIAL MANAGER?
Chief financial officer (=CFO) financial policy + corporate strategy
- Treasurer: cash management + capital raising + investor relations
- Controller: financial statements + accounting + taxes
Role of the CFO:
1. Cash is raised from investors
2. Cash is used to invest in real assets to run the business
investments
3. Once business is operative, assets generate cash inflow
4. Cash is either reinvested (a) or paid out (b)
GOALS OF THE CORPORATION
The investment trade off:
Suppose:
- Return is expected to be 12% for every $100 they invest, they
get $112 back
- Alternative investment opportunities at a return rate of 10%
investing in 12% to maximize ROI
If you’re a shareholder, you invest because you want return!!
,- Every shareholder has their minimum rate of return (=hurdle rate
=opportunity cost of capital)
- Return < hurdle rate not investing
- Return ≥ hurdle rate yes investing
, CHAPTER 2: FINANCIAL MARKETS AND INSTITUTIONS
THE FLOW OF SAVINGS TO CORPORATIONS
Flow:
1. Cash is raised from debt or equity investors corporations are
looking for money (cash shortfall)
2. Cash is used to invest in real assets to run the business all
money invested comes from investor savings (cash surplus)
3. Once business is operational, assets generate cash inflows
4. Cash is either reinvested (a) or paid out as a dividend (b)
A well performing financial system is key to ensure that savings can
efficiently fuel economic growth
Direct or indirect flow to the corporation?
- Investor financial markets corporation = DIRECT
- Investor financial intermediaries corporation = INDIRECT
- Investor financial institutions corporation = INDIRECT
Financial
markets:
financing
no financing
= protection
for risks
= hedging
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller lunadejonghe. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $11.14. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
47561 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 15 years now